On the Interaction of Risk and Time Preferences: An Experimental Study

Authors: Anderhub, Vital¹; Güth, Werner¹; Gneezy, Uri²; Sonsino, Doron²

Source: German Economic Review, Volume 2, Number 3, August 2001 , pp. 239-253(15)

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Abstract:

Experimental studies of risk and time preference typically focus on one of the two phenomena. The goal of this paper is to investigate the (possible) correlation between subjects' attitude to risk and their time preference. For this sake we ask 61 subjects to price a simple lottery in three different scenarios. At the first, the lottery premium is paid `now'. At the second, it is paid `later'. At the third, it is paid `even later`. By comparing the certainty equivalents offered by the subjects for the three lotteries, we test how time and risk preferences are interrelated. Since the time interval between `now' and `later' is the same as between `later' and `even later', we also test the hypothesis of hyperbolic discounting. The main result is a statistically significant negative correlation between subjects' degrees of risk aversion and their (implicit) discount factors. Moreover, we show that the negative correlation is independent of the method used to elicit certainty equivalents (willingness to pay versus willingness to accept).

Document Type: Original article

DOI: http://dx.doi.org/10.1111/1468-0475.00036

Affiliations: 1: Institute fot Economic Theory, Berlin, Germany, 2: Israel Institute of Technology, Israel

Publication date: 2001-08-01